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Flexibility in Trade Bloc Design

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A key characteristic of any trade bloc is its “flexibility” – the extent to which it can bemodified or augmented by existing members. This paper investigates howprospective trade bloc members value the flexibility of proposed trade agreements ina changing trading environment. We demonstrate that country characteristics as wellas the nature of the trade shock influence a nation’s desire for trade bloc flexibility.Our model of endogenous coalition formation yields predictions that are consistentwith three stylized facts which characterize regionalism: (i) overlapping tradeagreements, (ii) the popularity of free trade areas relative to customs unions and (iii)renegotiation or disbandment of existing trade agreements is rare. Finally, for the firsttime in the literature, we provide clear predictions about the identity of “hub” and“spoke” trade bloc members when overlapping free trade areas arise in equilibrium.

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Mark Melatos, Stephanie Dunn

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